An annuity is a type of insurance contract and retirement vehicle that lets you grow your money tax-deferred.
When you purchase one, you have the option to add riders, which are optional features that provide advantages not offered in the standard arrangement.
Adding riders to an annuity can be helpful because it allows owners to customize contracts to their specific needs.
Let’s look further into the world of annuity riders, including the most common riders available and how each of them can help you meet your financial goals.
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Types Of Annuity Riders
Annuity riders fall into two broad categories — living benefits and death benefits.
Living benefit riders serve you, the annuitant, during your lifetime, whereas death benefit riders serve your beneficiaries in the event of your passing.
Living benefits often correlate with immediate variable or indexed annuities, helping to ensure a minimum return in the face of market volatility, while death benefits commonly augment deferred annuities, such as fixed annuities, whose accumulation phase allows for the possibility of the annuitant’s death before they can begin receiving payments.
As you’ll see, however, there are plenty of exceptions to these correlations.
The Most Common Annuity Riders
Annuity riders can benefit you or a loved one in different ways. Below are some of the most common annuity riders you should be aware of and how they might help you reach your financial goals.
We’ve classified them by the annuity types with which they’re often associated:
Immediate Annuity Riders
Cost-of-Living Adjustment
The cost-of-living adjustment rider helps offset inflation by increasing the amount of your annuity distributions by a specified percentage every year.
Cash Refund
The cash refund rider is a death benefit. If the annuitant passes away while the total of their distributions falls short of their principal, then the difference goes toward their beneficiary in a lump sum.
Imagine, for example, that an individual purchased a $200,000 annuity and received only $80,000 in distributions before their death. In that case, their beneficiary would receive a single payment of $120,000.
Installment Refund
The install refund rider is similar to the cash refund except that the beneficiary receives the money in installments.
Commuted Payout
With a commuted payout rider, you can make lump-sump withdrawals up to a certain proportion of your total annuity account, in case you need extra cash while your annuity continues to grow.
Variable and Indexed Annuity Riders
Guaranteed Minimum Accumulation Benefit
The guaranteed minimum accumulation benefit rider offers some protection against market changes.
If your annuity’s accumulated value falls short of your principal after a certain time frame, the rider ensures that your payouts will at least match the principal you’ve invested.
Guaranteed Minimum Income Benefit
The guaranteed minimum income benefit rider ensures that your annuity never pays less than a specified amount, effectively setting a minimum (though not a maximum) threshold.
Ordinarily, you must wait out a holding period of up to 10 years before you can take advantage of this rider.
Guaranteed Lifetime Withdrawal Benefit
With the guaranteed lifetime withdrawal benefit rider, you receive an annual income for the rest of your life without the need for conversion to an immediate annuity. Annuity providers may also offer this rider with fixed annuities.
Disability/Unemployment
If you develop a disability or lose your job, the disability and unemployment riders can help support you by temporarily increasing the amount of your payouts. These, too, are commonly associated with fixed annuities as well.
Fixed Annuities
Long-Term Care
Should you lose the ability to take care of yourself or become confined to a nursing home, the long-term care rider allows you to access a greater amount of your annuity’s accumulated value.
As with the disability or employment rider, you will see an increase in your monthly distribution to help cover essential care services.
Terminal Illness
If you develop a terminal illness that severely shortens your life expectancy, the terminal illness rider waives your surrender charges — fees one would normally pay to access accumulated value before the allowable period.
This is not only to help you cover the costs of your palliative care but also because you’d otherwise be unable to receive payouts from your annuity at all.
Hopefully, now that you’re more familiar with the riders that you can use to enhance your annuity, you feel more comfortable about incorporating annuities into your retirement plan.
If you need help figuring out which riders would best suit your means and goals, we recommend speaking with a financial adviser to discuss your options.
